Coalition Loyalty: What the Rest of the World Knows

Imagine if Shell, Kroger, Macy’s, Delta Air Lines, Visa and CVS joined to form a loyalty rewards program Dream Team, one that allowed consumers to accumulate and redeem thousands of points on purchases of gas, groceries, apparel, travel and drugs – at any of the participating merchants they chose.

This kind of universal, or “coalition,” loyalty program is available and quite popular in many countries, including neighboring Canada, but not in the United States. The U.S. market is dominated instead by what’s known in the industry as the single-operator loyalty program.

Why? Around the world, coalition programs thrive with memberships approaching 1 billion, according to estimates by Finaccord, a British market research firm:

* No less than 60 percent of German households participate in the Payback program, where points can be collected at 175 partner companies.

* In Australia, more than eight million people, in 5 million households, are FlyBuys loyalty cardholders.

* And in Canada, the 20-year-old AIR MILES Rewards Program stands as the international benchmark for the operators of coalition loyalty programs. The program, with participants from two-thirds of Canadian households, gives back $500 million in member rewards annually.

Indeed, at AIR MILES, we have learned that the more coalition merchants a member purchases from, the more she will spend with the company that first brought her into the program. So if she entered the program through a drug store chain, and then expanded her purchases to a supermarket within the coalition, she’d actually start spending more at the drug store chain. And her spending will increase exponentially with the number of merchants she shops in the coalition. We call this the “network effect,” and it doesn’t mean the consumer is spending more money overall – it shows that she is concentrating her purchases within the coalition.

All of which makes me wonder why the coalition model hasn’t taken hold in the United States.

My hunch is that the sheer size of the U.S., combined with the regionality of many of its merchants, contributes to its lack of coalition. But that does not explain why the coalition model does not exist on a regional basis. There are also strong themes involving brand focus or control of customer information, which also may explain why large chains such as Safeway, Target and Walgreens are not involved in partner-based loyalty plans.

New, single-issuer programs are launching in the United States weekly – according to COLLOQUY, the average U.S. household is enrolled in more than 18 programs, for instance, but participates in only around eight. At some point, the number of competitors, combined with the consumer’s limited ability to engage in multiple programs, will dilute the impact of “marginal,” single-issuer programs.

Moving forward, the best way for these programs to compete could well be through alliances. Some companies are inching in this direction – we are seeing more enterprises connect their loyalty initiatives through partnerships, such as the Shell and Kroger fuel discount program. But these two-party partnerships are still quite limited from the consumer’s point of view, and my hunch is that to be viable and competitive long term, they’ll need to expand beyond what we’ve seen so far.

The missing component to this change may well be the coalition operator – the company that would hold and manage the data, issue the rewards and sponsor collaboration between the participating companies. I think it is just a matter of time before that changes because the benefits are measurable and the consumer will seek greater value.

We’ll just have to wait and see who are the first companies to see the potential.